How to set up a debt payoff plan and stick to it

One of the most challenging aspects of dealing with debt is knowing how to pay it off. Determining which payments to make first and finding room in your budget can create as much stress as the debt itself. In these situations, you need a clear debt payoff plan.

A debt payoff plan takes a comprehensive look at all the debt you owe and organizes it into a structured, consistent routine to pay it all off. The goal is to make the payoff process manageable by working within your budget so you’ll be more likely to stick to it and work toward financial stability.

Here’s how to create a realistic plan for ensuring you’ll meet your debt payoff goals and get your finances under control.

1. Believe you can do it 

Sometimes, the biggest obstacle to becoming debt-free is a battle you fight against yourself. Many people doubt their capacity to get out from underneath the mountain of debt on their shoulders. 

However, it is possible to get out of debt, even in amounts that seem impossible. One of the most important elements is to believe you can do it. If you don’t, it will be difficult to stick to your goals or have the determination needed to make necessary changes. 

You might realize it isn’t possible to pay off the debt with your income level, even with a lot of sacrifice and dedication. In those cases, you may want to raise your income or declare bankruptcy. 

2. Take inventory of all your debts

Before you can tackle your debt and formulate a plan, you’ve got to know what you’re up against. This starts with getting a firm understanding of everything you owe.

Begin by creating a list of all your debts. This typically includes your:

• 401(k) loans
• Auto loans
• Credit cards
• Family loans
• Home equity loans and lines of credit
• Mortgage
• Pawnshop loans
• Personal loans
• Student loans
• Title loans

A helpful place to find some of your active accounts in one place is to get a copy of your credit report. You can do this online through many free resources or download a copy from any of the three major credit bureaus — Experian, Equifax, and Transunion. It may help to get a copy from all three since not every creditor reports to all of them. For each account listed, visit the website to log in or contact the creditor directly.

Don’t forget to include accounts that aren’t on your credit report but you still owe, such as family loans and title loans.

For each debt you find on your credit report, take note of the:

• APR or “annual percentage rate” (i.e. interest rate)
• Minimum payment amount
• Number of remaining payments
• Outstanding balance

3. How much room is in your budget?

In addition to tallying up your debt, you’ll also need to understand how much money you have available to pay it down. This is accomplished by taking a good, hard look at your budget.

If you’ve never budgeted, the best way to get started is to add all your monthly expenses and subtract them from your total monthly income. The goal is to determine how much money is left over for your debt payoff plan. Then, look for opportunities to maximize this amount.

When your budget yields less than expected, it may be time to reconsider your spending habits. Look through your expenses and prioritize necessities such as food and shelter. 

For the ones that aren’t critical, ask yourself a serious question: Why am I spending money on this? For example:

• Do you have streaming subscriptions that you don’t use? 
• Are you going out to eat too often or attending too many sporting events?
• Are you overpaying for a vehicle when cheaper options are available?

As the actor and social commentator Will Rogers once said, “Too many people spend money they haven’t earned to buy things they don’t want, to impress people that they don’t like.” In other words, don’t be unrealistic with your budget and focus on what’s important.

4. Choose a debt repayment plan 

To win the battle against your debt, you’ll need to do more than just pay the minimum. What you want is a strategy that’s simple and effective and has the potential to accelerate your progress.

Fortunately, many good debt payoff plans can do exactly that.

Debt snowball

The debt snowball is a popular repayment method where the smallest debts are eliminated first. It begins by prioritizing them from least to greatest balance (regardless of APR). From there you’ll focus on your resources on the debt with the smallest balance while only making the minimum payment on the others. 

Like a snowball, you’ll build momentum each time an account gets paid off. It’s also a great way to stay motivated because you’ll celebrate several milestones throughout the process.

Debt avalanche

Similar to the debt snowball, the debt avalanche is another popular repayment method. However, instead of putting your debts in order by the size of their balance, you’ll arrange them by interest rate. Focus on eliminating the one with the highest APR first while making the minimum payment on the others. This will help you save money by spending less on interest over time.

Debt management plan

A debt management plan (DMP) may also help you lock in lower interest rates with your creditors and get out of debt faster than you’d be able to on your own. When enrolling in a DMP, a credit counselor will negotiate a lower interest rate on your credit cards and design a payment plan that allows you to become debt-free over several years.

You’ll then send monthly payments to the credit counseling agency so they can distribute your funds to your creditor until all your debt is paid. A DMP may be a good fit if you want an affordable payment plan that aligns with your lifestyle and budget.

5. Track your progress

A helpful way to stick to your debt payoff plan and stay motivated is to regularly check in on your progress. You can do this using an app on your mobile phone or a manual method like a spreadsheet.

If you’ve slashed your expenses but still aren’t moving as fast toward the finish line as you’d hope, you may need to consider taking up a side hustle to earn some extra income. There are plenty of flexible options that allow you to work on your own time for a reasonable rate. For instance, job platforms like Upwork, Fiverr, and Freelancer offer all kinds of short-term gigs that don’t require training or technical expertise. 

6. Take your debt payoff plan to the next level

If you’ve got good to excellent credit, then leverage it to your advantage using one of the following strategies:

• Balance transfers: Several major credit cards offer promotions where new card members pay no interest for six to 18 months. These can make good opportunities to move your balance off a high-interest card and enjoy several months without interest accumulation.
• Debt consolidation loan: You may be able to consolidate your debt with a loan that gives you lower interest rates than your original creditors, helping you save money on interest. You can use that saved money to pay down more debt.
• Negotiate with lenders: Sometimes, the best way to get help is by reaching out to the creditor directly. They may be able to erase certain fees, give you a lower interest rate or work with you to reach some other arrangement. You might qualify for a hardship program if you’ve lost a job or have had another incident that made it harder to pay your bills.
• Refinancing: Refinancing is when you swap your current loan for one with better terms. For instance, many people refinance their mortgage when interest rates fall because it can shave hundreds of dollars off their monthly payments.

7. Hold yourself accountable

Throughout this entire process, always remember: The only person who can make it a success is you. 

Regularly renew your enthusiasm for this process by reminding yourself why you’re doing it in the first place. Perhaps your goal is to buy a home or have enough money to start a family with less stress. This goal is personal to you and can help guide you through every step.

It can also be valuable to let your friends and family members know that you’ve made a debt plan and find one or two people you can share it with. Including others can help keep you accountable and open the door to advice if you struggle.

The bottom line

Dealing with excessive debt can be overwhelming, but a structured and realistic debt payoff plan can help you find relief. Before selecting a strategy, understand how each option works to decide which is best for your financial situation. Set yourself up for success by starting with a viable budget that makes it easier to keep your spending in check and reach your goals more quickly.